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Morgan Stanley | RESEARCH tively adjust upward our multiple on future carried interest earnings by 2 turns. For Apollo, we see that nearly the entire the increase in value in the upside case is driven by the expansion of the FRE multiple from 15x to 22.5x. 2018 Impact: Upside case impact is +13% vs. current price on average and 3.8x multiple expansion to a fully taxed EPS. In our upside case scenario, we assume a 22.5x multiple on fee-related earn- ings in our SOTP. We see favorable risk/reward skew APO. Exhibit 7: We see the greatest contribution of fee-related earnings at ARES and APO as a percentage of pre-tax earnings 2018e Pre-Tax Earnings Contribution aulnvestment Income «Performance Fees mCore Fee Related Earnings NORTH AMERICA INSIGHT ~~ Downside case impact assumes no multiple expansion of any kind, and that the stocks trade at their same current P/E, however on lower, fully taxed EPS. This represents -18% average downside from current prices. While this is likely an unreasonable outcome this is the concern among some investors, given that the only certainty in the analysis is a higher tax drag and lower earnings. We see less favor- able upside/downside skew for BX and KKR. Exhibit 8: On average we see potential for 3.7x turns of multiple expansion on in our upside case with fully taxed EPS at a 24% effective rate. This could drive +12% upside on average to current share prices P/E Multiples for Alts: Potential Expansion =Total Multiple Expansion in C-Corp Upside Scenario (on fuly taxed EPS @ 24%) 100% = Current Multiple on 2018e EPS 90% om 22.0x 19.0x 60% 17.0x aes 16.7% 44.7x 50% = Ate 12.5x 40x 14.6x . 40% 7 fee 12.0x 4ax 9.8x 30% ay 14x 20% 39% 7.0x 9, t) 11.3 0% 2.0x ARES APO BX OAK KKR- CG Avg. Source: Company Documents, Morgan Stanley Research estimates -3.0x Note; Fee Related earnings are on MSe Core methodology, ARES Core FRE include BDC Part 1 Manage- % Upside ARES APO BX OAK KKR CG Avg ment fees that are typically excluded from MSe Core FRE definition to Stock 9.2% 26.5% 9.3% 11.3% 10.7% 7.5% 124% Source: Company Data, Morgan Stanley Research estimates Exhibit 9: Summary Scenario Analysis: Potential upside/downside valuation and multiples impact if Alts convert to C-corp structure and pay a full 24% tax rate Upside Case Assumptions: 1) Fully taxed earnings and carry receivable Downside Case Assumptions: 1) Fully taxed earnings and carry receivable balance 2) 22.5x Multiple on core FRE 3) Multiple expansion on carry of two balance 2) 15.0x Multiple on Core FRE 3) No P/E multiple expansion on fully turns to an average of 9.5x 2018-20 avg. performance fee earnings taxed EPS 4) Back into implied multiple on future carry of 5.6x on avg. i =) 9, i i . ka . 9, . A ; Current Valuation (C Valuation Price/Fully A Current P/E vs. % Upside Price Valuation (C ; Valuation AGurrent PIE vs. % Downside Price Ticker Price Corp Taxed EPS wi 24% Taxed Change From Corp Price/Fully Taxed wi 24% Taxed EPS Change From Conversion) EPS Current Conversion) EPS ° Current APO $36.42 $46.07 14.6x 4.7x 26.5% $31.20 9.9x 0.0x -14.3% ARES $24.70 $27.18 19.1x 4.8x 10.0% $17.95 12.6x -1.7x -27.3% BX $36.78 $40.18 15.4x 4.1x 9.3% $29.51 11.3% 0.0x -19.8% CG $25.60 $27.52 9.8x 1.4x 75% $23.62 8.5x 0.0x -7.7% KKR $24.40 $27.01 12. 5x 3.6x 10.7% $19.21 8.9x 0.0x -21.3% OAK $45.20 $50.31 16.7x 4.0x 11.3% $38.39 12. 7x 0.0x -15.1% Average 14.7x 3.8x 12.6% 10.7x -0.3x -17.6% Median 15.0x 4.0x 10.4% 10.6x 0.0x 17.4% Source: Company Data, Thomson Reuters, Morgan Stanley Research estimates. Note: Price as of 1/26/2017 HOUSE_OVERSIGHT_025559